2017-0688901E5 Farm Property

Principal Issues: Whether capital gains deduction available in situation described.

Position: Question of fact. In the situation described, likely yes.

Reasons: See below.

Author: Flisfeder, Anna
Section: 110.6(1.3), (2)

XXXXXXXXXX                                                                                                                    A. Flisfeder
                                                                                                                                           2017-068890
June 21, 2017

Dear XXXXXXXXXX:

Re: Farm Property

This is in response to your correspondence dated February 8, 2017, in which you asked whether the capital gains deduction under subsections 110.6(2) and (2.2) of the Income Tax Act (the “Act”) would be available in the following situation described.

An individual’s parent owned a parcel of land that was actively farmed by him for several years until his death in XXXXXXXXXX. The individual’s surviving parent subsequently sold a portion of that land and rented out the remaining land to another arm’s-length farmer until a portion of that land was transferred to the individual in XXXXXXXXXX. The individual continued to rent the land to an arm’s-length farmer until it was sold.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

It appears that your question relates to either a proposed transaction or a completed transaction involving a specific taxpayer. The Directorate cannot confirm the tax treatment of such transactions outside the scope of a request for an advance income tax ruling in respect of proposed transactions. In addition, the availability of the capital gains exemption for qualified farm or fishing property is primarily a question of fact, which cannot be determined without a complete understanding of all the relevant facts. Nevertheless, we are prepared to offer the following general comments. Generally, subsections 110.6(2) and 110.6(2.2) of the Act permit a capital gains deduction of up to $500,000 for an individual who is resident in Canada throughout the year and disposed of QFFP in the year after April 20, 2015.

In respect of an individual (other than a trust that is not a personal trust), the definition of QFFP in subsection 110.6(1) of the Act includes “real or immovable property… that was used in the course of carrying on a farming… business in Canada” by certain qualifying users including, among others, the individual, spouse, common-law partner, child, parent or grandparent of the individual.

Subsection 110.6(1.3) contains additional conditions that must be met in order for property, such as land, to be considered to have been “used in the course of carrying on a farming… business in Canada.” The specific conditions that need to be satisfied depend on when the particular property was last acquired:

*     For properties last acquired before June 18, 1987, or after June 17, 1987, under an agreement in writing entered into before that date, the applicable test is described in paragraph 110.6(1.3)(c).

*     For all other properties, the applicable test is described in paragraph 110.6(1.3)(a).

In the above-described situation, since it appears that the individual acquired the particular property before June 18, 1987, we will limit our discussion to the conditions set out in paragraph 110.6(1.3)(c).

In general terms, paragraph 110.6(1.3)(c) is satisfied if one of the following two farming-use tests is met:

*     in the year the taxpayer disposed of the property, or the property it replaced, the property was used principally in a farming business in Canada by a person described in clauses 110.6(1.3)(c)(i)(A)-(E) (which includes, among others, the individual, spouse, common-law partner, child, parent or grandparent of the individual); Or

*     the property, or the property it replaced, was used principally in a farming business in Canada for at least five years by any of the persons referred to above, and during this time, the property was owned by any of these persons.

Generally, a property is considered to be used principally in a farming business if its primary use (that is, more than 50% of its use) is in respect of the farming business operation. It is a question of fact whether a particular farming operation constitutes a farming business at any particular time. Some of the criteria to be considered in making this determination are set out in Income Tax Folio S4-F11-C1, Meaning of Farming and Farming Business, Interpretation Bulletin IT-322, Farm Losses, and Chapter 7 of T4003, Farming Income Guide. While it is a question of fact, if at least one of the individual’s parents used the land principally in a farming business carried on in Canada for at least five years, then the applicable test described paragraph 110.6(1.3)(c) would likely be satisfied.

We trust these comments will be of assistance to you.

Yours truly,

Michael Cooke, CPA, CA
Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate

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